The Present Scenario
The year 1991 saw a great boom in the stock market in Pakistan. This was a natural result of the far-reaching reforms made by the present government in opening the shackles from the economy. Among other measures, as the restrictions governing movement of foreign exchange regulations diminished, there has been a net inflow of foreign exchange into Pakistan, mostly from Pakistanis living abroad. With growing confidence in the seriousness of GoP to go further down the road to economic emancipation, money that had been domestically hoarded has also come back into the market. With bucketfuls of money being pumped into the acquisition of shares, the stock market became extremely bullish. This has been further accentuated by the wide ranging reforms in the financial market, resulting in the opening up of many financial institutions, among them Modarabas, leasing companies, private banks, etc. Every new offering in the stock market obtains a premium for a unit share, now anybody who has some money salted away (and has the time and inclination) and applies for shares in new public ventures, manages to clear a profit of between 150-200% on his/her original capital if the application is successful in the computerized drawing of lots. In a manner, it is legalized gambling.
The net result of all this has been an artificial feeling of an economic boom, this euphoria has been understandably fanned by the present government. While it was extremely necessary to encourage the population to invest their money rather than hoard it, in order to fuel the dormant economy, there is need to bring in checks and balances to protect the small investor. One finds the small non-institutional investors such as housewives, tradesmen, office employees, etc are now a significant part in the stock market. One side effect has been that bank accounts have been opened by the hundreds of thousands because share applications have to be routed through the banks. Since this has boosted bank deposits in an artificial manner, some nationalised (and mainly privatised) banks are holding up this fact as a measure of the confidence of the general public in their services, which is in fact not consonant with the actual truth. However, the availability of liquid cash and the tendency of the public to gamble has encouraged a rash of public offerings, one hopes that much of the money will remain within the market as long-term investment and the natural shyness of our general public to risk their money will not return.
The market situation is not being orchestrated by artificial means, it has a natural quality about it, this makes it important for the government to take some lessons in its efforts to effect quick privatisation of the government-owned and nationalised sector. In the last decade or so the most successful (and the best known) privatisation scheme has been carried out by Margaret Thatcher in the UK. The objectives of Thatcherite privatisation did not begin and end with the selling off of industries at a profit to the government but aimed rather at drawing the small investors to shore up the economy with their money, in transferring the ownership of the industries and businesses into the hands of good management so that they could run successfully and profitably, thus ultimately giving a fair dividend and ensuring that the general public became confident about long-term investing of their money in the successful ventures. Our privatisation effort has been a mixed approach of pragmatism and ad hocism, with each diverse effort being proclaimed as a successful innovation that GoP was likely to follow.
The worst thing that GoP could do was to hold the Privatisation Bazaar. One may disagree with Ms Benazir and the PPP about any number of things but the Thatcherite way her government disinvested some shares of PIA was the route to be followed. Depending upon the size and nature of the corporate unit, a percentage of shares should have been put on the stock exchange for computerized drawing of lots. Once 35-40% of the shares had been disinvested in this manner, a larger bloc of shares could have been laid on the auction block for a management buyout. The process should have been kept deliberate, this would also invite greater foreign investor confidence. This method would have ensured a much higher return for GoP while inducing the small investor to come (and stay) in the stock market. It is no wonder that the Privatisation Commission has come in for a lot of stick in the media, anytime a process seems to be less than fair it will draw appropriate approbation from the Fourth Estate. As has been very apparent from the last SEMINAR on privatisation held in Karachi, Senator Lt Gen (Retd) Saeed Qadir, Chairman Privatisation Commission has become ultra-sensitive about questions about propriety, his refusal to answer questions did not help him or GoP in countering public criticism, the questions may or may not have been fair. His seniority and experience as a former Cabinet Minister should have ensured mature handling of the media, as it is a reputation has been built up of arrogance tinged with contempt.
One of the acute problems facing the journalistic community is the reaction they face in the uncovering of corruption in the public sector. Needless to say the corrupt have a lot of loose money lying around, this buys them influence and contacts that they make effective use of in the counter-attack on detractor journalists in some manner or the other in order to muzzle them. Conceivably, Robert Maxwell has been one of the greatest Corporate crooks that the world has ever seen, yet because he had the ability to cow down the Opposition by threats of legal action and/or by using his known contacts within the intelligence community, Maxwell managed to blackmail the media from uncovering the unsavoury facts about him. The whole objective of such scoundrels is to coerce the journalists either by making them bankrupt or undercutting their credibility by use of their friends in the intelligence services to label them “disloyal”, some of these characters have cornered the market on loyalty. Some of the recent moves in Pakistan to counter attempts by the media to uncover malfeasance point to a deliberate witch-hunting. Exposure of these DIRTY TRICKS employed by the unscrupulous would be a great embarrassment for the democratic government, already having a credibility problem much out of proportion of the actual facts.
Because of anomalies in the overall situation, particularly of a lack of seriousness in trying to uncover corruption, there is a growing nervousness in the market and this is reflected in the falling of share prices. This reflects an imbalance in the economic infrastructure, most of which can be blamed to the long years of bureaucratic ineptitude that kept the economy under tight shackles, but the government must also seek to correct itself when and where it is necessary. The general public may not accept what the Opposition says as the Gospel Truth but a drumbeat of facts has its own dynamics and may give truth to outright lies, GoP should take note of it.
The bullish situation in the stock market having registered a sharp downturn, what does one expect in the short – and medium-term? While doomsday soothsayers predict the worst, there are aspects of the Pakistani economy that defies accurate analysis and prediction, mostly because we have always had a parallel economy that refuses to go away, unfortunately this seems to be our saving grace. The overall decline in the world economy leading to recession seems to have been checked. With signs of upturn in the US and other world economies, one does not expect to have a Great Crash in Pakistan unless we have another scandal of Coop proportions. However, there is no cause for complacency and the basic imbalances in the economy must be corrected by enforcing the rules correctly and if required, to modify the regulations accordingly.
One of the decisions of the GoP must be commended and that is to giving back the State Bank of Pakistan (SBP) its constitutional responsibility in the governing of the financial sector. The finance and cooperative scandals of the last 15 years have been possible because of the exploitations of loopholes by the unscrupulous in the presence of divided responsibilities between the SBP, the Pakistan Banking Council (PBC) and the Ministry of Finance. The role of PBC having diminished, the Ministry of Finance should gradually hand over all day-to-day responsibilities to the SBP. Two very fine officers of the SBP, Mr. Sibghatullah, who will oversee Operations and Mr. Ashraf Janjua, who will look after Policy, have been appointed Deputy Governors of SBP recently. The SBP must work out an effective mechanism to govern the many private financial institutions coming into the market, one would not like to see the Modarabas, Leasing companies, etc go the way of the investment and finance companies into oblivion to the detriment of the general public. However, SBP will have to strive a balance between monitoring and governing, with the weight on the side of monitoring rather than on governing. For the reforms to succeed, the economy must not be shackled again by bureaucratic restrictions that benefit no one but the bureaucrats themselves.
While the downturn in our share prices is a cause for concern, corrective measures will even the present imbalance. What is of greater concern is the pressure on the value of the Pakistani Rupee against the US dollar, the next few weeks may see a rapid decline in Rupee value as our overall deficit increases. This casts great aspersion in our revenue generation and gathering measures, unless we can bring more people into the tax net and obtain the due revenues, we shall be subjected to hyper-inflation on the Latin/South American pattern that may not be conducive to our continued economic growth. On the other hand, Argentina has been through the same set of reforms that we have and has ultimately managed to control inflation, at great political cost to the rulers perhaps but in the long-term, a great boon to the people. Courage rather than expediency must be the hallmark of our political leadership if we are to continue down the road of amelioration of our economy.
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